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Operator: Welcome to the Avnet Second Quarter Fiscal Year 2023 Earnings Conference Call. I would now like to turn the floor over to Joe Burke; Vice President, Treasury and Investor Relations for Avnet.

Joe Burke: Thank you, operator. Earlier this afternoon Avnet released financial results for the second quarter fiscal year 2023. The release is available on the Investor Relations section of the company’s website. A copy of the slide presentation that will accompany today’s remarks can be found via the link in the earnings release, as well as on the IR section of Avnet’s website. Some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Such forward-looking statements are not the guarantee of performance and the company’s actual results could differ materially from those contained in such statements.

Several factors that could cause or contribute to such differences are described in detail in Avnet’s most recent Form 10-Q and 10-K and subsequent filings with the SEC. These forward-looking statements speak only as of the date of this presentation and the company undertakes no obligation to publicly update any forward-looking statement or supply new information regarding the circumstances after the date of this presentation. Today’s call will be led by Phil Gallagher, Avnet’s CEO; and Ken Jacobson, Avnet’s CFO. With that, let me turn the call over to Phil Gallagher. Phil?

Phil Gallagher: Thank you, Joe, and thank you everyone for joining us on our second quarter fiscal year 2023 earnings conference call. I am pleased to share that we delivered another quarter of solid financial results, which exceeded the higher end of our sales and earnings guidance. More importantly, we achieved these results despite the macro headwinds affecting certain areas of our business, which I’ll touch on in a minute. In the quarter, we grew sales 21% year-over-year in constant currency, making it our eighth consecutive quarter of double-digit year-over-year sales growth. We believe this growth resulted in another quarter of gaining market share, thanks in large part to our customer partnerships and the dedication and execution of our employees.

Efficient management of our operations also enabled us to drive solid operating margin of 4.5%, which is the fourth consecutive quarter of greater than 4% operating margin. Further, the combination of strong sales growth and effective management of operations allowed us to increase operating income nearly three times faster than that of revenue on a year-over-year basis. During the quarter, we saw continued strength in the Americas and EMEA regions and began to see signs of slowing in Asia beyond the COVID-19 customer shutdowns, which had some impact on both electronic components and Farnell. Our team has executed very well in helping our customers manage market complexities, as they face dynamic supply chain conditions and uncertainties. From a demand perspective, in the quarter, we saw continued strength in key vertical segments, most notably transportation and industrial.

In the last earnings call, we indicated that lead times were improving. And in the second quarter lead times continued that trend for many products. Although, for certain products, lead times still remain extended. Across all regions, we’ve been coordinating closely with customers and suppliers to effectively manage our backlog. As a result of those actions our overall book-to-bill ratio softened during the quarter and we exited the second quarter below parity on a global basis. Across the supply chain, inventory levels remain elevated, including that of many of our customers. In order to support our customers, as they continue to be challenged with higher inventory and obtaining all the key parts required to complete their products, our inventory levels also increased this quarter, which Ken will speak to further in his commentary.

Overall, we remain comfortable with the quality of inventory and are working to improve our inventory turnover heading into the third quarter. Our role as a distributor is particularly critical in these types of uneven environments. As we have proven over the years, the value of Avnet and the complex operating environment is our ability to serve as a control tower for our customers and suppliers, helping them to proactively manage their supply chains. With the changes we have made to organization over the past two-and-a-half years, I’m confident that we are a much stronger and more resilient company today and are well positioned to deliver value and quickly adapt as marketing conditions change in the future. So with that, let me turn to the highlights for our business.

Electronic Components business drove year-over-year sales growth across all three regions. In constant currency, Electronic Component sales were up 23% year-over-year the seventh consecutive quarter of 20% or greater organic sales growth in constant currency. I am particularly proud of our EMEA team, delivering record sales and operating income for the quarter. The Americas team also continued to make steady progress and delivered another strong quarter with sales, and achieving the highest operating income in several years. The Americas and EMEA regions both benefited from strength in key verticals, notably, industrial and transportation. In Asia, we experienced a softening of demand as we worked with customers to adjust their backlogs due to lead time improvements.

Additionally, many of our customers across the region experienced challenges with their operations due to the rise in COVID-19 cases. I’m proud of our Asia team’s continued success not only in ensuring business continuity, but it consistently gaining market share in the region at the same time. Although our Asia business saw signs of slowing, they continue to get market share during the quarter and a favorable sales mix led to operating margin expansion during the second quarter both sequentially and year-over-year. Overall across all regions we continue to benefit from our unique engineering and demand creation capabilities with our field application engineers and digital design tools once again achieving record revenue and gross profit dollars for demand creation.

We believe this ongoing strength is indicative of the increasing value of the capabilities we provide to both our customers and suppliers. Now let’s turn to our Farnell business. Farnell sales declined sequentially and year-over-year and continue to be impacted by product availability and pricing. As shortages for certain parts begin to moderate, customers will shift some of their orders to volume distributors thereby affecting demand and pricing at Farnell. As we announced last quarter, we are the exclusive distributor for the Raspberry Pi single-board computer, which continues to see more potential in industrial applications. The backlog for single-board computers remains robust. And when certain key semi-electronic components become more available towards the end of our fiscal year, we expect to realize such sales.

Operating margins for Farnell were over 9% during the quarter. Our operating margins are lower this quarter. It’s really important to note that Farnell’s margins are still two times that of Avnet’s overall operating margin. Our investments in Farnell’s eCommerce platform and improved user experience continued to yield results with 55% of Farnell’s total sales and 73% of total orders placed through the eCommerce platform this quarter. We are pleased with these results and expect to see increased traffic and new customer acquisitions in the quarters to come as certain components for new product introductions and single-board computer products become more available. Additionally, Farnell has a diverse product mix that not only solves customers on-the-board needs, but also supports test and measurement as well as industrial maintenance and repair operations as needed.

For the long-term, we remain very excited about Farnell and continue to see opportunity to leverage Farnell’s and Electronic Components’ unique and synergistic collaboration. This allows us to better serve our customers and suppliers for new product introduction to mass production and is a key differentiator for Avnet. To recap, while we are pleased with the strong finish of the calendar year 2022 and the better-than-expected results for the quarter, we are closely monitoring market visions and the impact of component lead times on our backlog and inventory levels as products become more available. We expect to experience a high end of seasonal sales declines in the Asia region due to the Lunar New Year with some uncertainty on how COVID-19 may impact the return of the workforce once the holiday is over.

We’re also keeping an eye on the impact of rising interest rates inflation and the signs of slowing growth in the global economy. We continue to be confident in our team’s ability to execute in a dynamic and uncertain environment by delivering value to our supplier and customer partners. We have been in the business for over 100 years. We have weathered many market cycles and our team is up to the challenge. There has never been a greater need for the capabilities that Avnet has to offer and we look forward to continue to play a critical role at the center of the technology supply chain. So with that I’ll turn it over to Ken to dive deeper into our second quarter results.

Ken Jacobson: Thank you, Phil. Good afternoon, everyone and thank you for your interest in Avnet. The Avnet team delivered another strong quarter of sales and operating income growth compared to the year ago quarter. We are very pleased with our second quarter and the calendar year 2022 financial performance. We believe we continue to be well-positioned to deal with the market challenges and uncertainties that Phil previously mentioned. In the second quarter, our sales were $6.7 billion, up nearly 15% year-over-year, exceeding the top end of our guidance range. This represents our 10th consecutive quarter of year-over-year sales growth. In constant currency, sales growth was 21% year-over-year with each region contributing to the growth.

Sales were flat on a sequential basis in constant currency, which was above our typical seasonal trend and included a higher mix of sales from our Western regions. We had year-over-year sales growth across all of our regions led by EMEA, which delivered a record $2.3 billion of sales. On a year-over-year basis in constant currency, sales grew 38% in EMEA, 21% in the Americas and 9% in Asia. From an operating group perspective, Electronic Component sales grew 16% year-over-year or 23% in constant currency. Electronic component sales were flat quarter-over-quarter in constant currency. Farnell sales declined nearly 8% year-over-year and was flat with the prior year in constant currency. Excluding sales of single-board computers, Farnell sales grew 4% year-over-year in constant currency.

For the second quarter, gross margin of 11.7% improved 29 basis points quarter-over-quarter and was down 49 basis points year-over-year. The sequential improvement was primarily due to higher gross margins across all three regions as well as a shift in sales mix from Asia to the Western regions. We continue to maintain discipline around SG&A expenses as adjusted operating expenses were $484 million for the quarter, down 3% year-over-year and up 2% sequentially. Adjusted operating expenses increased 4% year-over-year in constant currency to support the 21% sales growth. As a percentage of gross profit dollars, adjusted operating expenses were 62% in the second quarter, a full eight percentage points lower than the 70% a year ago. Adjusted operating income of $301 million increased 39% year-over-year and grew 2.7 times greater than sales.

This is the eighth consecutive quarter of operating income growth exceeding our sales growth. Our adjusted operating margin was 4.5% in the second quarter, which improved 80 basis points year-over-year and improved 12 basis points quarter-over-quarter. By operating group, Electronic Components operating income was $297 million, up 57% year-over-year. EC operating margin was 4.7%, up 122 basis points year-over-year and up 47 basis points quarter-over-quarter. All three EC regions saw year-over-year and quarter-over-quarter operating margin expansion led by our EC EMEA business, which expanded operating margin by more than 200 basis points year-over-year. Farnell operating income was $37 million, down 39% year-over-year. Farnell operating margin was 9% in the quarter, down 461 basis points year-over-year and down 308 basis points quarter-over-quarter.

The decline in Farnell operating margin was primarily driven by a combination of lower sales in part due to the lack of availability of certain components for single-board computers and from a lower gross profit margin. The expected decline in gross profit margin was primarily related to the unwinding of pricing premiums as certain components became more available. Farnell continues to be the highest margin within Avnet and their operating income margin continues to be two times greater than Avnet’s overall operating income margin. We expect Farnell operating margins to remain at similar levels for the second half of fiscal 2023 as seasonal sales growth will be offset by the continued unwinding of pricing premiums on certain components. Turning to expenses and gains below operating income.

Second quarter interest expense of $59 million increased by $37 million year-over-year and $14 million quarter-over-quarter primarily due to a combination of increases in interest rates and higher borrowing amounts to support working capital increases. This increase in interest expense negatively impacted adjusted diluted earnings per share by $0.31 year-over-year. During the second quarter, we entered into legal settlements, which resulted in a one-time gain of $62 million. This gain benefited second quarter GAAP earnings per share by $0.51. Our adjusted effective income tax rate was 23.6% in the quarter. Adjusted diluted earnings per share were $2 for the quarter, which increased 32% year-over-year and were flat quarter-over-quarter. Turning to the balance sheet and liquidity.

During the quarter, working capital increased by $876 million including a $318 million increase in inventories. As a result of this working capital increase, working capital days was 84 days for the quarter which increased 11 days quarter-over-quarter. Our inventory days increased by approximately six days and our receivable days increased by approximately four days quarter-over-quarter. Our return on working capital continues to be higher than our cost of capital and improved over 100 basis points year-over-year. Our inventories grew during the quarter due to a combination of factors, including customers requesting delays of product shipments changes in foreign currency exchange rates compared to last quarter and an increase in Farnell inventories, as components became more readily available.

We have seen an increasing trend of customers rescheduling product shipments as they manage their inventory, production timing and cash flow challenges. This contributed to the increase in days of inventory, as turns slowed during the quarter. The quality and freshness of our inventory continues to improve year-over-year. During the second quarter we also saw a slowdown in the collection of receivables. Our team continues to work diligently with customers to collect past due receivables and effectively manage bad debt risks. Our team has done a tremendous job since the onset of the pandemic in minimizing bad debts by proactively managing the credit and collection activities with our customers. While we continue to focus on improving inventory turns our top priority is to ensure we are managing overall customer risks appropriately.

The increase in working capital led to an increase in debt of approximately $850 million and a corresponding $321 million use of cash from operations. The increase in debt led to a gross leverage of 2.4 times at the end of the quarter. At quarter end, we had approximately $300 million of available borrowing capacity and our teams continue to work on selling inventory on hand and collecting receivables to provide additional liquidity. In the second quarter, we repurchased approximately $64 million worth of shares, which represented nearly 2% of shares outstanding. We have $319 million left on our current share repurchase authorization entering the third quarter. We continue to prioritize our existing business needs including working capital and capital expenditures when we evaluate share repurchases.

During the second quarter, cash used for investing activities including capital expenditures was $107 million or an increase of approximately $90 million quarter-over-quarter, primarily to support a new warehouse being built in EMEA. During the quarter, we also paid our quarterly dividend of $0.29 per share or $26 million. Book value per share improved to approximately $48 per share or an increase of approximately $6 per share due to a combination of strong earnings, lower share count and changes in foreign currency exchange rates compared to last quarter. Turning to guidance, for the third quarter of fiscal 2023, we are guiding sales in the range of $6.15 billion to $6.45 billion and adjusted diluted earnings per share in the range of $1.75 to $1.85.

Our third quarter guidance is based on current market conditions and implies a sequential sales decline of 4% to 8%. This guidance assumes a seasonal decline in sales from Asia, primarily due to the Lunar New Year and below seasonal sales growth for the Western regions. This guidance assumes similar interest expense compared to the second quarter an effective tax rate of between 22% and 26% and 92.5 million outstanding shares on a diluted basis. In closing, I want to thank our team for delivering another strong quarter of sales and earnings growth. During calendar year 2022 we delivered sales of over $26 billion and adjusted diluted earnings per share of over $8. Avnet’s diversification of suppliers, products and the end markets we serve are key differentiators that will enable us to be resilient, despite uncertain and challenging market conditions.

With that, I will turn it back over to the operator to open it up for Q&A. Operator?

Operator: Thank you. Ladies and gentlemen, we’ll now be conducting a question-and-answer session. Thank you. Our first question is from Melissa Fairbanks with Raymond James. Please proceed with your question.

Melissa Fairbanks: Hi guys. Thanks very much. Great work navigating kind of uncertain times today. It’s really great to see these results and the outlook. You did mention that lead times are improving for a lot of the products. Last quarter you gave us some detail on to which products still had the longest lead times. I was wondering if you could maybe give us a little bit more detail on that.

Phil Gallagher: Sure Melissa. This is Phil and thanks for your compliment there. Appreciate that. So yeah, I know this is a hot one, right? So yeah, we did say that we’re seeing some modest improvement right, maybe a little bit better than modest. But at the end of the day lead-times they’ve stabilized in the vast majority of the products but are still at levels 20% to 60% higher than pre-pandemic, okay? So, while some products are coming in products like MCU particularly in automotive analog power, IGBTs, MOSFETs, 45-nanometer, FPGA programmable logic are still in many cases significantly constrained. So, that’s what makes this market so much more complex than what we’ve maybe experienced in the past. And IP&E and passives ceramics 12 to 18 weeks, some cases 26 to 32.

are still 26 to 56 weeks. Resistors like thick films still 52 to 72 week lead-times. So, it’s kind of a mixed bag. The connector guys overall, again as a general statement are probably the lowest of all the categories in interconnect. They’re probably averaging 13 to 16 weeks depending again on the type of connector products. So, I was just summing up, high-end controllers, anything around power, op amps, voltage regs, things along those lines are still pretty tight as well as I said automotive. But — yes — no — so, probably cleared as much for you, right? But it’s kind of — it’s still a little bit all over the map.

Melissa Fairbanks: No, that’s actually really helpful. Absolutely. Yes, I really appreciate the detail. Maybe one for Ken on the growth in inventory. This is something that obviously everyone is paying really close attention to. You highlighted a few different factors behind the growth this quarter. And I think it’s fairly well understood what’s driving it. But can you maybe quantify was the majority of it due to Farnell? Was the — what was the kind of breakdown the contribution there?

Ken Jacobson: Yes, I would say about 50% was actually driven by FX that we did have some challenges there. Farnell is about another let’s say 25% of that and then the rest was call it just slower turns and those types of things. But I will comment that the FX impact kind of offsets what was last quarter so it would be kind of a wash over the past two quarters the FX has kind of normalized. So, clearly just some broader growth in the regional inventories this quarter mostly in the West versus last quarter it was mostly Asia.

Melissa Fairbanks: Okay, great. Thank you very much guys. That’s all from me now.

Phil Gallagher: Thanks Melissa.

Operator: Thank you. Our next question is from Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Ruplu Bhattacharya: Hi, thanks for taking my questions. I was wondering if you can delve a little bit deeper into the margin performance for each of the segments. So, in components on flat sequential revenue, you had 50 basis points of margin improvement. Is there any way that you can parse out how much of that was because of pricing versus say volume versus mix versus FX? And how should we think about the sustainable level of margins in the component segment? And same question for Farnell, I mean 300 basis points sequential decline any way to parse that out between all of these factors?

Phil Gallagher: Yes, I’ll go first and let Ken jump in. You kind of answered the first part of that question Ruplu. A lot of that is mix, okay? Regional mix. Very little on ASP inflation this quarter although we had a lot of supplier price increases that would not really affect the margin necessarily maybe some of the dollars, but not the percent in the margin. But most of it is the mix. We noted that we said that we saw some softening coming out of Asia at the end of the quarter and we had strengthening in the West. And when that happens we pick up some margin. So it’s really just good execution by the team. On Farnell, yes, so, again we’ve signaled this as well. They get some appreciation in a upmarket or a more constrained market so they get some let’s call it a natural upside.

And some of that as products are coming into — back to the question we just got from Melissa where some lead times are starting to come in the more the — some of those customers they get I’ll call it nontraditionally come back into the volume space. So, they’ve seen some margin pressure and of course some of the volume decline. Thus the negative drop-through. Ken do you want to comment?

Ken Jacobson: Yes. On the components business, I would say it’s regional mix but then we did have a more favorable let’s say product customer mix. If you recall what we said last quarter was because gross margin was down a little bit there. All of our regional businesses had a more favorable mix and then the regional mix between the West versus Asia was the bigger driver there with controlled expenses obviously, right? And then when you get to Farnell, I would say, approximately 50-50 between the sales piece and then the deterioration of the gross profit margin due to the unwinding of the premiums. That’s probably the right way to think about it.

Phil Gallagher: I do want to highlight though Farnell — we’re still extremely pleased with Farnell. Their operating margins are two times the core. So we’re going to continue to be doubling down on the Farnell performance and growth.

Ruplu Bhattacharya: Okay. Thanks for the details there. Phil, you made a comment that Asia is softening. And for the next quarter you’re guiding below seasonal growth in the West. So, can you maybe touch a little bit deeper into that like which end markets or which verticals are softer now and in Asia versus in the West? And how do you see that progressing as you go through the year?

Phil Gallagher: Yes. So, tough to call throughout the year. So I want to be careful on that one, because the market fluctuates so much. But right now, look, as we’ve already talked about there’s a bit of inventory oversupply right in Asia-Pac in general, okay? And Ken just talked about we had some inventory increase last quarter there. Except in the automotive, automotive is still strong. Matter of fact automotive and industrial, we’ve got great momentum in Asia-Pac. It’s really the end consumer, the applications, your PC, mobile, they continue to look pretty weak. And then you got to remember the — just a reminder, we’re no more traditional, if you will, whatever that word means anymore with the Lunar New Year, right? So that’s kind of been on and off the last couple of years with COVID.

So we’ve got to see how that affects the market and the volumes of people that come back to work if they come back to work, right, when they go into the Lunar New Year. So we’ve got to watch that. And then, of course we got the unpredictability of the COVID, right? And what’s going to happen that had a negative impact on us as well. But overall, I want to be clear, we’re really pleased with our Asia performance and we believe we’re gaining share. We have a really diverse market in Asia, a lot of times you think Asia everything is China. I mean we’re doing really well in Southeast Asia, the Greater Taiwan. We have a nice business in Japan. So a little bit more diversified outside of just China. But of course we have a good presence in China as well.

So, a bit of a mixed bag. On the West, I can comment on this a little bit. I mean the West — and you’re right, typically we’ll see a sequential increase quarter-on-quarter from December to March. But again, a lot of these are the old traditional curves, if you will from the quarter-to-quarter seasonality, I should say. They’ve all been kind of thrown out the last couple of years. But typically, you do see the West come back. And we’re having a good performance in the West. We just — frankly as we said had pretty much record quarters in Europe. And so they’re just going against a tough compare but the number in Europe is solid for the March quarter we believe as the Americas.

Ruplu Bhattacharya: Okay Phil, thanks for the details there. If I can sneak one more in. OpEx as a percent of gross profit, is that at a stable level now? It looks like it’s been in the 62% of gross profit over the last couple of quarters. Or do you have more levers to take out costs? So how should we think about OpEx going forward? Thanks.

Ken Jacobson: This is Ken. I would say, I wouldn’t think about additional cost takeout. Clearly depending on market conditions, we may have to tighten our first strings a little bit, but no significant actions planned at this time at these levels of sales. And so I would say, it’s a pretty stable percentage at this level of sales.

Ruplu Bhattacharya: Okay. Thanks for all the details. Appreciate it.

Ken Jacobson: Thanks, Ruplu.

Operator: Thank you. Our next question is from Matt Sheerin with Stifel. Please proceed with your question.

Matt Sheerin: Yes. Thank you. Phil, I’m hoping that you can be a little bit more specific on the book-to-bill ratios that you’re seeing by region? And then on the push-outs that you’re seeing from customers, are you seeing cancellations as well? And as you’ve gotten through the quarter so far has that gotten worse or stabilized?

Phil Gallagher: Yes. Thanks Matt. So on the book-to-bill, yes, we don’t provide it at a regional level but we’ll just share that we’re — as we said in the script, we’re negative book-to-bill or below parity now in all regions. I would say, the one that’s closest to parity is still the Americas then Europe then Asia, okay? So — and I said this before they’re moderating, but I don’t see that as a negative thing. We’ve had such a run-off of positive book-to-bills that were excessive as we all know on the call that this is I think a natural and healthy moderation of the book-to-bill. So, it’s not — really doesn’t have any overly concern. And because a lot of this, to your second part Matt is, I want to say, suffered, but we’re managing the backlog.

We’re working with our customers on this. And there’s certainly as the market shifts still reluctant to cancel. I mean, so we’re having to do some of that form if you will in the backlog. They might be rescheduling, which push out. But our cancellation rates and I’m looking at the chart now as I’ve said in previous calls our buffer €“ our shock absorber in backlog is roughly 25% to 30% adjustments in any given day, where we’re either pulling in pushing out canceling. Right now, we’re running between roughly around 27%. So, it’s up a couple of points, but nothing that’s overly alarming. And again, we watch that on a daily basis. So, that’s how we’re seeing it. I mean, I think, I don’t think, it’s a negative thing. I think, it’s an adjustment in the market that, the market is required.

Matt Sheerin: And you commented previously on a question regarding seasonality next quarter. It sounds like you’re saying that even though Europe and North America will be below seasonal they’re both going to be up sequentially?

Ken Jacobson: Matt, I would say, flat to down slightly, and then Asia obviously down. And that’s where the drop in revenue comes from. But I think just to remind everyone, when we move into our third and fourth quarters we’ve got a higher mix of Western sales. So, we offset some of that sales decline by higher gross margin, because of the more favorable mix.

Matt Sheerin: Okay. So Europe too. Okay. Okay. Great. And then just lastly on the inventory, it looks like your inventory was up roughly 40% year-on-year. Your guiding revenue you’re down modestly year-on-year. You talked about customers pushing out orders. Can you do the same thing? Are you turning around and canceling or pushing out orders to your own suppliers to try to start working this down?

Phil Gallagher: Yeah. Everyone is a one-off Matt. every supplier depending on the commodity has different €“ we’ve got different NCNRs non-cancel non-returnables and all those things in place. But where we can, we certainly are. And we’re also working out with our customers. So, we do believe, as we say, we’ll start turning that inventory. The inventory is good inventory. It’s fresh inventory. We have a customer that needs some help for a challenge. And we’re in it for the long haul. So we may be carrying a little bit more than we would for some customers, because we want to work with them for the long term, and not force them to take something we know they’re not going to be able to pay for or don’t want or need. And that’s not €“ that doesn’t bode well for the relationship.

And again, we’ve been in this situation before it’s not our first rodeo, but €“ yes, it’s a constant negotiation of all one-offs. I will say the positive is, we’re not seeing suppliers ship early. We’re not €“ so I think that’s a really important point. So €“ I’m sure I’m going to get that question. But €“ so it’s just, they’re catching up, based on lead times coming in okay, and then we’ve got to work with the customers to see what other parts they need to finish out their builds.

Matt Sheerin: Got it. Okay. Thanks, Phil.

Phil Gallagher: Thanks, Matt.

Operator: Thank you. Our next question is from Jim Suva with Citigroup. Please proceed with your question.

Jim Suva: Thank you, Phil and Ken. Phil, when you were away from Avnet for a little bit of time, there were some supplier relationships that kind of went up for bid had some changes. Some of them adversely affected Avnet. Some of them did not. Now that, we’re exiting COVID are the suppliers coming back and talking about changes or new terms or anything different? Because it seems like the past two to three years it’s been anything but stable. Thank you.

Phil Gallagher: Yeah. Thanks, Jim. Yeah, those were some interesting years. They’re behind us, with the supplier, I’ll say destabilization. No, I think the supplier €“ supplier ratios have been extremely positive. And we even note that, when it comes to things like demand creation they’re actually leaning on us more as we saw our demand creation numbers go up again this quarter to some record numbers. So I think that, the supplier relationships are strong partnerships as they are relationships and they’re actually asking us to do more for them. So now, I’m very open about this. We don’t sit in the boardrooms. We don’t know, who’s looking to potentially buy who, and that we can only control how well we execute for them. And when we look at the top suppliers on the semi side and the top suppliers on the IP&E side, we’re pretty much number one or two with every one of them. So, conversations right now are very strategic and very positive as we sit here today.

Jim Suva: Yeah. And €“ no I didn’t mean that in a negative way like share losses or disengagement in a minute. Just as far as discussions could they potentially be evolving into more demand creation or more services are holding or consignments that didn’t happen pre-COVID?

Phil Gallagher: Yes. So, thanks, Jim. So what €“ some of the suppliers are acknowledging that customers are looking for as much around solutions as they are chips €“ they want total solutions, right? Board solutions not just chip solutions. And that’s where we can offer that value of the chip plus the balance of the solution for the customer. So €“ and as engineering resources to become more and more scarce and difficult to get and more on the software side, the suppliers can scale with us and we’ve got the reach to help them get to that other customer base that they may not be able to get to. So in that regard I mean there’s not a meeting we have with the supplier that we’re not talking about demand creation. A matter of fact, it’s the first thing you want to talk about.

And then on the supply chain as we call Supply-Chain-as-a-Service or our Avnet Velocity business we’ve had more suppliers coming into us and large OEM customers say, “Hey we need some help in building out the supply chain capabilities. The suppliers want to drive R&D manufacturing, sales and marketing and you know us for some of our supply chain capabilities. So I think that’s been a real positive through these last 2.5 years and I think it’s very sticky.

Jim Suva: And then maybe a follow-up for Ken. Ken, you mentioned premier Farnell’s margins came €“ come down a little bit some of it due to sales, some of it due to the removal of the premiums that happened during the shortages. I’m wondering have those premiums now been largely or completely resolved, or are those premiums still coming out of the model, where we should model a little bit more margin compression in the quarters ahead? Thank you, gentlemen.

Ken Jacobson: Yes. So Jim, thanks for the question. I think how I’d look at it would be €“ and I think I said this in the commentary where it was really €“ they’ll have a seasonal uplift in sales because they’re more of a Western kind of business but that will be offset by the continued unwinding. So I’d say €“ I don’t know, if I’d say most but over half, but there’s still some to go. And so that’s kind of what we’re expecting as a flattish or a stable margin €“ operating margin because you have higher sales offset by some further pricing deterioration to get to a steady state. And we do see positive signals, especially when it comes to what we just talked about with product availability, the single-board computers and the components needed we see that being a positive momentum going into our fiscal year 2024.

Jim Suva: Well, thank you, Phil and Ken. Congratulations to you and your teams for navigating a very challenging time.

Ken Jacobson: Thanks, Jim

Phil Gallagher: Thanks, Jim

Operator: Thank you. Our next question is from William Stein with Truist Securities. Please proceed with your question.

William Stein: Great. Thanks for taking my questions. First, the receivables increase I think was a little bit unusual. I know you guys historically have not had any sort of unusual collection issues. So I don’t think, we expect that this during the cycle. But I wonder if you can comment as to any concentration in the AR increase either by geo or end market or any other way you’d categorize it?

Ken Jacobson: Yes. Thanks, Bill. I guess I would say no specific concentration. But again, we don’t have any major customer concentrations or supplier concentration that matters. We like the fact that we’re not beholding to any one customer or supplier. But what I would tell you is it was kind of across the board regionally, and part of it was challenges the customers with their own cash flow situations that we worked through like Phil talked about. And on the other part was just quite frankly, it was December 31 and people want to pay us in January and that was a piece of it which kind of then recovered early in the next quarter. So I would say we actually just had a call with the team today because we are definitely focused on credit collections, any high-risk areas that we can get the business involved in.

And I think they’re saying actually the aging has improved a little bit. Still have about a normal amount of past dues but it’s improved a little bit but clearly something we continue to focus on.

Phil Gallagher: Well I’ll just jump on that. You actually €“ because actually a couple of years ago when all this started to happen with COVID, 2.5 years ago, we actually were very concerned about receivables and from a standpoint of bad debt and we’re concerned that customers aren’t going to make it the ones with the weaker balance sheets. And actually we’ve been pleased, frankly that we’ve not had that, okay? A little extension yes for sure we’re all over it. But our bad debt exposure of write-offs if you will have been minimal, okay? And that’s a complement to our collections and receivable teams and the business overall. I just want to add that on.

William Stein: Yes. I appreciate that. Two other real €“ well, one quick one and then a more in depth one if that’s okay. It sounded like the way you were talking about the changes in order patterns, the backlog, the order reduction. It sounds like that was more of a China-focused event, but I would think lead time is more of a global metric. So, I’m hoping you can just level set me on that.

Phil Gallagher: It is. No, I don’t know. The lead times are definitely on a global basis. And it’s not — no it’s not just Asia. As I said, we saw the West — I just said that the West was still a little bit stronger in book-to-bill than Asia Pac that’s all. And again, it would surprise anybody with the — what’s going on in Asia Pac right now. And what we’re doing is, as I said, we’re being a little bit more assertive and even the customers are with us in making sure we’re working to clean that backlog up. So to Matt’s point, we’re in fair negotiations with the suppliers in that side. Well, we don’t want product coming in that the customers don’t want, right? And suppliers don’t want us to have the product on the shelf that’s no good.

As they build out their capacity. They want to know what’s real and what’s not. So, that’s going back to Matt’s question, the suppliers some are working with us really, really well and letting customers out of the NCNRs because they don’t want to build stuff that they’re ultimately not going to want, other suppliers are a little bit more rigid. So everyone is a little bit of a one-off, but not unique to Asia.

William Stein: Appreciate that. Last one, if I can squeeze it in. Can you remind us of the capital allocation strategy or tactics however, you want to describe it the dividend in particular, what the plan might be for future increases there? Thanks so much guys.

Ken Jacobson: Yes. I think our — in the dividend in particular, our historical pattern has been once a year in the September quarter, we would look at increase, buybacks I think we’ve been pretty good there. We’ve bought back 8% of our shares since the last 12 months. This quarter, I would say, if you’d look at our buybacks plus dividend plus CapEx that was actually higher than any of the past few quarters, so we did have a larger CapEx. So from a priority standpoint, we’re going to continue to prioritize the business, in terms of needs for working capital and CapEx, before we get into returning to shareholders. But we think especially, as we start to get back to cash flow generation versus use of cash on working capital, we’ll be able to have enough to repurchase shares and we do look at it still is below — trading below book value and it still looks like an attractive price even though our stock has performed relatively well to others over the past couple quarters.

William Stein: Thank you.

Phil Gallagher: Thanks, Will.

Ken Jacobson: Thanks, Will.

Operator: Thank you. Our next question is from Joe Quatrochi with Wells Fargo. Please proceed with your question.

Joe Quatrochi: Yes. Thanks for taking the question. I was curious, how do you guys thinking about the pricing pressure that you’re seeing in Farnell, as being maybe correlated to the components business. Is this kind of like a leading indicator or a precursor that you are a little bit worried about?

Ken Jacobson: I guess, I would answer that. I don’t know that we’re worried about it. I think it was expected. We knew that we got some uplift there in the market and normally would correct itself. And I guess, how I would characterize it is, I think we talked about it as in the 200 basis points range maybe a little bit north of there, but we still have a very healthy margin gross margin in Farnell and they do have a pretty diverse product set, right? There’s on-the-board type components. And that’s really what we’re talking about pricing premiums when we talk about on-the-board semiconductors certain IP&E. But they also have a lot of their business in other kind of areas test and measurement, maintenance and repair. So there’s a nice balanced portfolio that can keep that steady margin we believe.

Phil Gallagher: Yes. So, Joe this, is Phil. I’ll just ramp that. No, it’s not a concern. We just spent a week with them in the UK last week. As matter fact, Ken and I, we’ve got a solid team. We’ve got a solid plan. Since we call this — we signaled this quarters ago. They’re a little afraid that’s going to come down. But on top of that the single-board computer backlog is really, really growing. So that’s impacting some of the top line. And that will definitely come back as Ken pointed near the end of our fiscal year into Q1 fiscal ’24.

Joe Quatrochi: Got it. And maybe just ask it a little bit differently. Do you see I guess the pricing pressure that’s happening in Farnell potentially spreading into the core components business, I guess is what I’m trying to ask.

Phil Gallagher: Yes. Okay. Got you. Yes. So — good question. Again, Farnell buys different than the core, right? There’s not as much from the shipping debit and things along those lines. So, you’ll see — it’s different. On our side — on the core side, we’ll start seeing some pricing pressure. Right now, not so much, okay? There’s still — a matter of factor there’s still as I called out 20-plus suppliers that raised prices in January. So back to the first question on lead time. Lead times are all coming in — not all of them because they’re still raising prices. So, there’s always pressure in the system, right? But right now we’re not seeing anything that overt that’s going to have that big a negative impact.

Ken Jacobson: And I would just add to that, there are competitive pressures will always put pressure on our gross margin, but we do have — we talk about Supply-Chain-as-a-Service, IP&E initiatives as well as our demand creation to help us kind of keep the margin stable, right? So we’re always probably going to have some competitive pressure going down, but we can keep on filling the funnel with the higher-margin revenues including Farnell and getting Farnell growing again helps offset that overall and that’s kind of how we’re thinking about the model.

Phil Gallagher: Yes. Sorry to jump back in Joe, but just because this is a good question. And that’s why we got to drive digital, right? And that’s why we’ve got to drive eCommerce and online sales. And in Farnell, we had I think a record-breaking number and 55% of the revenues were actually done online and 73% of the transaction. So, that really helps you drive and offset some pressures, because you have a much lower touch, lower cost to serve on that piece of business. So, I just want to add that in.

Joe Quatrochi: Yes. That’s helpful. And just maybe as a follow-up with March quarter revenue guidance declining nearly on the midpoint, how do we think about cash flow generation? Should we start to think about that as maybe inflecting positive? And then just also on that note how do we think about CapEx? I know there’s maybe more of a onetime kind of CapEx this quarter? How do we think about the CapEx in the next couple of quarters?

Ken Jacobson: Yes. To answer the CapEx question first, I’d say, it’s maybe more consistent flow. So, $25 million-ish a quarter give or take something would kind of be the expectation there on CapEx. And I’d say the answer is yes on cash flow, but we’ve got some work to do to get the inventory levels down and collect the receivables. So, that’s clearly the goal when sales go down. Our model then needs less working capital, including less receivables and less inventory and it works through. So, it may take a little bit more time than we’d like. But that’s what we’re clearly focused on this next quarter and then going into the fourth quarter.

Joe Quatrochi: Thank you,

Ken Jacobson: Thank you.

Operator: Thank you. There are no further questions at this time. I would like to hand the call back over to Phil Gallagher, CEO for any closing comments.

Phil Gallagher: Thanks a lot. I want to thank everyone for attending today’s earnings call. Yes I look forward to speaking to you again in our fiscal third quarter earnings report in early May. Have a great 2023.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.